Today I added Martin's proposed eComm Fall 2009 (Goodbye Minutes, Hello Moments) to the schedule.
I was left with the feeling that it may be worth digging back to the debut eComm in 2008 and having that talk also transcribed. This is found below.
Lee: Please welcome Martin Geddes. He is a senior analyst at STL [now Head of Strategy, BT].
Martin: Thank you. In my day job, I run around the world advising operators and their suppliers about future business models in Telco. I am a co-founder for Telco 2.0 Initiative [now Head of Strategy, BT] along with my colleagues at STL Partners. You might have come across our Telco 2.0 blog and other work. I am a little bit shortsighted. Because I cannot actually read the clock at the back; I'll be talking to you for the next few hours about how to turn the dinosaurs into mammals. The research that we have been doing in the future business models is around broadband. It is about rethinking the phone company.
Before we begin, let us look somewhere outside the telecom industry because the process that is occurring for the telecom industry is one that in fact all industries go through, where in their very early days they are immature and very vertically integrated. Over time, they become more modular.
Airlines used to cater their own food and they used to maintain their own airplanes. They lose those functions. In the financial services industry, the bank used to sell the mortgage to you and keep it on its books for 20 years whereas now, you go to one place to compare mortgages, the brokers go and buy it. Another brand is the person who sold it. Someone else securitizes it. There are lots of different roles in the industry now. It is a very wholesale-centric industry.
The industry that we found that has the most analogy to telecom was one that also is in the business of shipping stuff around. Telecom at its heart is about shipping around ones and zeros from one place to another. It is "tele-com."
An industry that looks very similar in its structural changes that it had undergone was actually the container shipping industry. I'd like to share with you a few of the things that happened when we went from the old break-box system, which was how cargo used to be shipped around, to putting the physical goods in to standardized-size packets and putting them on standardized-size ships and standardized-size lories and trucks.
Five things occurred. I think the last one of these gives a very powerful clue as to where the telecom industry needs to go. The first thing that happened was that all the old pricing structures of the container shipping industry fell apart. There used to be different rates for different types of freights. The same thing happening in telecom is that pricing by distance, by geography, by media type, by time of day, by how long you talked, are all disappearing.
The second thing was that certain people in the old ecosystem doubled down on the old model. So the port of New York for example, in 1970's, invested in lots of IT and new infrastructure to refresh the break-box system and lost 100% of its business. The port of Newark, which invested in the container system, picked up all the business.
The third thing was that the traffic tends to concentrate on certain places, which are ports where people have to exchange the traffic between each other. We are seeing the same effect occurring on the internet today, which is the Googleplexes of the world. That is where all the traffic is concentrating. There are very strong increasing returns to scale for that infrastructure. A few people tend to dominate the exchange of traffic on this network.
But the forth thing related to that was that it was the ports that made the money and not the shipping lines. We are seeing that happening in the telecom industries. The assumption in the Telecom boom of the late 1990's was that it was the people who owned the fibers, who would make the money. It turns out that there are lots of routes between points A and point B. The people at point A and B are making the money, in particular the places where everyone has to congregate to exchange the traffic.
But, it was not actually the ports that made the most money. The company who now is the biggest shipping line in the world, started off as a logistics company. The logistics companies had the most compelling solution. The people were able to take the thing from the factory at one end, put it onto a truck, onto a train, take it to the port, put it onto the sea container on the ship, and then do the reverse at the other end. The ones who managed that whole process were the ones who made the most money. It was Maersk managed to reverse engineer themselves back into ports and shipping, and is now the biggest shipping line in the world.
The main message from this presentation is that telecos likewise need to learn how to do logistics. They aren't in the business of innovating in terms of applications to end users, though there are certain things that they can continue to do in that space. But, the primary business in the future is the logistics, the data, and explaining what that is and what it means. There is a twist. The twist is that they need to embed it in what is known as a multi-slide to business model. I will explain in a moment what those are and how they look like.
Firstly, why is the current model that the telecom industry has screwed? Since 80% of the industry is voice, we are talking about emerging communications. I just focus on voice. We did a survey of around 800 people inside the industry in the fall of last year and asked, "How do you think telephony or voice minutes should be generated five and ten years from now?" We gave them four options. Dark red is traditional telephony. Pink is other forms of telephony offered by carriers within enhanced featrures for IP like wide band audio or in presence. The green is private voice application like Skype, and the blue is all kinds of non-traditional telephony embedded into Kiosks and into Xbox games and to ClicktoCall and elsewhere.
What people are predicting is that there will be a big shift in the next 10 years into people making calls within the context that the call makes sense, not necessarily using traditional telephone system to make those calls. The reason for that, I think, is there are really five different completely separate user needs that are built around telephony.
The basic thing is the call itself, the ability to connect to people and to talk remotely. We have seen lots of different businesses grow up to try and attack that part of the telecom's business model. But really, a lot of the phone calls that you hear people make are "I will be there in five minutes. I am on the train." They are doing manual exchanges of presence and location data to try and help themselves rendezvous. When you see someone instant message you on Skype and say, "Is it a good time to call?", it is trying to help time and synchronize that rendezvous process. So, the people who are good at helping people rendezvous will be controlling the applications in which the calls are being launched.
Then above the call, you have the conversation. How do we go about triggering calls in the first place? Like in Gmail, on the left hand side, it has a list of people with whom I have recently interacted. It is trying to prompt me to make calls and initiate conversations. Again, it's the people who are able to not just help the rendezvous of a particular time and place, but work out who shall I be talking to next?
On top of that, you have the context in which relationships are formed. eBay is a website in which people help form commercial relationships. You get another context in which the calls will be launched from, and then one in which the carriers weren't in control.
Finally, when you want to have to group communications, then that is a community-based activity. You see on MySpace and Facebook, communities emerging. They own the context and therefore, they will control who makes the call and where it is made from.
A good reason to believe that the operators will not be able to reverse themselves into these different contexts was we asked in the survey, "How well do you think the operators understand the needs of their own customers in their primary product of voice?" The opinion of people inside the industry is "not very well," which is hardly a surprise.
Therefore, how do the operators go about making any money? It was not internally driven innovation and new features you are trying to offer to consumers, it was to open up the platform. But, it is the big question, what is the business model for doing that? There are lots of telcos out there thinking about API's. But, API's are not the answer in a sense. That is just a means to the end. What is the new business model?
First a bit of education about two sided markets, because they are a relatively new area of economic study. I'll describe what I mean. Today's telecom's business model is a one-sided business model for the most part. They take a relatively simple segmentation between consumers and small business and large business. They take revenue from those people and they pass that revenue on to suppliers who offer subsidized handsets, interconnect, and the network equipment. It is a one-sided model that flows from one side to the other side.
In a two-sided business model, you are a platform in the middle that helps to connect two different groups of people. Those people want to interact through you because you, in the middle, make it cheap and convenient for them to do it. There is potentially revenue on both sides. Money could potentially flow in from both sides. We think that there are all kinds of natural byproducts of the telecom industry; the information that they gather is very, very valuable.
Google, for example, took the social gestures that people were making between websites, which were hyperlinks, treated them as endorsements, aggregated those all together, did a bit of mathematical magic, and got a Page Rank. That was able to generate the search results. They managed to retrieve this latent value that was out there in all this data. The users are investing their most valuable things, which are their time and their money, in making phone calls.
The telco knows you are making these phone calls. It is extremely valuable data. But, they haven't worked out yet a way of building a data-driven business on top of the network. The data is very, very important to creating a new business model.
In particular, people like Google are paying increasing amounts of money to get access to some of these kinds of data. If you look at Google's cost base, it's rising because they have to pay all kinds of partners to get the data that lets them help personalize the marketing messages. It is the same data that often the telcos themselves already have, as a natural byproduct of offering communication services.
We see three future business models from the highest-level perspective inside the telecom industry in the future. The first one is traditional retail. Telcos keep trying to sell you ISP plans and buckets of minutes. The second one is wholesale from the other side. It is like an MVNO. It is a sample of a wholesale business. Telco just opens up its network and sells that capacity on to some third party, but it has no relationship with the end users who use that capacity. The third one is the important one. It is the two-sided model.
To give examples of two-sided businesses, Google is a two-sided business model. How does it work? Unlike SalesForce.com, who have to charge for their piece of software as a service, is Google offers free search to the users, offer value to those users. As a result, they get a huge audience and they are able to offer cheap advertising to advertisers. You might think you are paying lots of money to Google for your AdWords campaign, but compared to running that same level of effect through traditional media, it is very, very cheap. They have invested an enormous amount of money in the underlying IT platform and transaction costs in doing so are very, very low.
A very important lesson about why two-sided business models work is two groups of people want to come and interact through you because you are able to offer a very low cost of transacting and interacting. It is like when Diner's Club launched the credit cards. You could still pay in the past in a restaurant with cash or a check, but it cost a lot more for the two-sides to do that. You have to make sure you brought your checkbook with you, that you had the right amount of cash. It didn't offer any credit position to the user, so you offered value on both sides.
Another good example of a two-sided business model is a company that IPO'd in the UK a year or two ago, which is Betfair. What they do is they provide online betting services, which would be horribly illegal in this country, but are very popular in the UK. They joined two groups of people together. In this case, it is "punters", who want to place its bets, and "bookies."
What is interesting about Betfair is they started with a one-sided business model. They were just offering their own bets to the public. They almost ran out of cash. They were on death's door and they suddenly opened up an API. They said "Hey!" to the other bookies, "You have got different odds. You have got different betting products on political betting, sports betting. You come along and offer more bets on our platform."
The founders are now billionaires and Betfair conducts more transactions than all the European stock markets combined. When a two-sided business model on a platform is successful, it is very, very powerful.
The new proposition that telcos need to bring into the market is an addition to what they have today. In today's model, they bundle together voice, video, and data, and try to sell that at retail to the user. The theory is because the users do not like to shop around a lot. They buy this bundle and are locked in for a long period of time. But, there are some fundamental problems with this business model, one of which is the voice problem I said earlier.
The costs of offering internet access are rising fast as people get the tastes of online videos, for example. We wrote a blog page recently highlighting it. The first month, in which the BBC launched the iPlayer, its offer of free high-quality content in the UK, it tripled the streaming costs of an ISP whose traffic figures were published. The move to video and doing it all over broadband is slowly eroding the ISP business model. In Japan, they are moving huge amounts of v-packet inspection equipment, being installed at the moment. Korea moved back to metered broadband. There are some basic fundamental problems in that business model.
What they need to add on are personalized logistic services for data, which is what worked in the physical goods arena. The word 'personalized' is also important. You are not just delivering something from A to B, but you are doing it in the right way for the people who are sending and receiving these things. I will give you a few examples later.
What do these logistics businesses do? They do two things. An example is FedEx. FedEx is a one-sided business, but it is a logistics business. They do two fundamental things, one of which is distribution. They collect things and then they send them over multiple modes of transport from motorcycle couriers to trucks, to airplanes and to multiple forms of delivery. They offer a whole bunch of value-added services to the people who are sending stuff. They offer tax management and tracking of parcels, all kinds of things I never even heard of, like 'denied party screening'. As it turns out, you cannot deliver certain kinds of packages to certain places and people. They help manage all these processes.
For telecoms, it is very similar. They have to offer a whole bunch of distribution capabilities to upstream partners. I'll talk through some examples of those to bring it to life in a moment.
Secondly, they have to have a value-added services platform for the upstream partners. It's not just to try to sell ringtones, Java games, and stuff, downstream to the customers and the public. It's how do you build a bunch of stuff that all the people who want to deliver their applications to the public would benefit from when you're using paid for?
First the distribution platform; operators need to work out how to offer new kinds of wholesale distribution of products. An example, from in this room, is the Cloud who is a Wi-Fi network, are offering a wholesale product, Truphone.
When you make a Truphone phone call, you pay an extra three pennies a minutes and you do not have to pay the Cloud as an ISP. If I'm in a hotspot, I do not have to bring out my credit cards and say, "I need to make a Skype call or Truphone call" and pay your $10 for an hour. Instead, you pay through the partner. You do not pay directly to the Cloud. It is through the partner.
To take advantage of this change, the users are going to start using voice embedded in other people's applications. If you want to make money from that, you have to start becoming a supplier to the people who want to offer these applications.
Another example of that would be 3 in the UK partnering with Skype to offer the Skype phone. 3 is still supplying the minutes and it is making money from this. But, they have managed to separately brand those minutes and segment their market out.
The second one, this is really important actually, is video. The multi-mobile distribution really comes to life with video. They had Ribbit and yes, we are talking about 13 different ways of doing SIP, which is the multi-mobile thing for voice. The people who are winning the video game at the moment to people like Sky. They are taking broadcast content, sending it to the home hub and setup box. They are taking broadband contents, building caches in the network and also doing Peer-to-Peer redistribution of the content.
There are four different modes of delivery that you can load-balance between them. Logistics is not being a DUN pipe. It is a lot more complicated and rich than being a DUN pipe. It is much harder.
For products like the Apple TV, Apple have to pay Akamai, or whoever it is; Limelight or one of their compositors today, to deliver all these movies that you buy off the Apple TV product. The user still has to worry about those 4GB HD files counting against their fare usage plan or counting against their metered usage on a metered ISP plan, which is normal in the UK.
Instead, you offer a content delivery network to Apple and you also say to Apple "For this fee, we will deliver it to the user via one of the delivery modes we have got and we will do it in a way that does not charge the user per megabyte or count against their usage cap."
That is the two-sided model. There are two parts to it. You have an existing retail ISP relationship with the user or an IP TV product and you offer these wholesale services to other people who want to deliver other ideas of how you deliver video and other kinds of content.
The third one is all about packaging together the data and the application in a new way. The Amazon-Kindle is a good example of packaging together data with a device and not having to pay separately for an ISP plan. That is the distribution platform.
Then, there are the value added services. Telcos today are trying to build one of these, which is advertising, for the upstream partners. But, there is a problem. Left hand bar is the size of the telecom industry, middle bar is the size of the advertising industry, and right-hand pixel is the size of online advertising, including Google. There is not enough money in the right-hand pixel to go and pay for the large declining voice revenues. The telecom industry goes broke.
So, we have to do two things. One of which is you have to have to address a much broader range of customers, not just brand advertisers. The second of which is that you have to have a much deeper range of products for them, not just bombarding users with messages. Advertising is just a small part of marketing services and making the customer aware of your offer is only one stage in all the business processes that businesses everywhere engage in.
The job of the telco is to help try and take friction out of all these generic business processes that people have. A good example, that came from one of the speakers that at our last Telco 2.0 Conference, was VoiceSage. They help Endocet to deliver washing machines to people who are at home. By sending people text messages in an outbound phone call two hours before the washing machine is due to be delivered, the miss-rate goes from 25% to 5% and they save tons of money.
The buzzword to take away is communications-enabled processes. It is by helping to deliver those messages to the user at an appropriate time, that the telco makes money. They don't just offer a bulk SMS API.
The example that I have is that I was asked through SMS, by my electricity company, to send the meter reading. That message arrived when I was abroad. It is a waste of time. What a telco offers is an API that says, "We will forward this to the user when they get home." In fact, not only that, "We will personalize it in that we know that this user does not make phone calls in the morning." Maybe they are a shift worker. It is a stupid time to send the user a message. "We will offer a service by which we will maximize the return rate of meter readings for you." Rather than getting three or five cents per message, you get to start to charge 50 cents or a dollar for every successful outcome from that process.
How much could all this stuff be worth? We have done some very detailed modeling of how these new kinds of business model could develop. This is not forecast. It is more sizing of the opportunity. The green at the bottom is how much money the telecom industry will make by selling its stuff it has got today to customers it has today. There is a small growth in wholesale MVNO's, but the real growth comes from repackaging up the voice and selling it in new ways; repackaging the data and video.
Another example of distribution platform is why couldn't the airline, the British Airways when I flew over here, have been selling me the America calling plan for a week. They are little scratch cards that you get on the plane that cost you $25 or $50 and I text the secret code when I get here and I get provisioned with a week's worth of calling in America and a bunch of data. Everyone will profit. It is finding new ways and context in which to sell the voice and package them up differently. The value-added service is on top.
I think the distribution platform 10 years now will be about $250 billion a year. The value added services platform makes just under $100 billion a year. If you compare it to what will be the total telecom industry revenue by then, we are about 15%. It is quite plausible in terms of the structural change and timing of it.
There are five things operators need to do to make this happen and get it right. The first one is that platforms are all about scale like Google, there can only be one Google. There can only be one eBay. There is a Visa network and a MasterCard network and everyone else is tiny.
The second thing is the example I gave with the API and the meter reading. They had to package up the stuff for the upstream partners. Lots of the 'opened up the network' initiatives today are run from the technology side of the business. The API's capabilities are not the ones that the upstream partners need and are not packaged in the right way and are not buyable. We are seeing that with the advertising example. Telcos want to get into advertising, but they are not selling it in a way that the partners can buy.
The third one is you need to offer rewards to the users participating in this. It is like Google giving away stuff for free. That is the reward. The fourth one is that if other people are going to build a business on top of your business you have to be fanatical about support. An important last one, a very subtle one, is that the certain data like location, presence, and call detail records, which I call plutonium data, has to be processed inside special facilities and it cannot leave those special facilities.
Today's 'open up the network' model is "let us offer web services." "Hey, come and location-dip this user." I do not mind my electricity company location dipping me 24 hours a day to work out when to send me a text message. Instead, rather than the Web services model, it would have to be a software agent model or a mixture of the two; it's "How many times to come to the mountain?"
The software has to come into the telco environment to execute. It is like the reverse of Ajax, where software comes down from the Web server into your browser to execute. This is the reverse of that. Some software has to go up into the server environment to be executed. It has to be a software agent model.
Thank you very much. If you want to read more about it, then we write about this a lot in our blog, telco2.net. If you like, come to a conference next month in April. Are there any questions?
Brough: Thank you, Martin. We have four minutes left on Martin's time and we are also about four or five minutes ahead of time. So, where do we have... there in the back.
Audience 1: On your logistics model, one of the things that logistics companies provide is homologation, but that entails actually opening up the package. Is that a taboo topic for telcos to tackle or is that something that goes against the large scale of a telco; is that it is more of a long-tail thing?
Martin: One thing they offer is what?
Audience 1: Homologation is when you actually repackage for localized use to meet regulatory, customs, and other purposes for that particular region. I was wondering, basically twisting content, redoing content, and re-braining content. Is that something that telcos can still do or is that taboo in this model?
Martin: An example of that in the telecom industry would be transcoding. Someone wants to distribute a piece of video content. There is a crisis of carrying in the UK today between MPEG-2 and MPEG-4 in the [27:06.9] TV channels. There might be all kinds of existing infrastructure and setup boxes out there that only talk MPEG-2 and you want to send out MPEG-4. They don't talk that. The person in middle knows who has which boxes and transcodes it appropriately.
It is not about the packet inspection model. That is the thing that fell apart in the container industry. It did not scale opening up the packets to try and charge them differently. But, you can offer services to people that say "Yes, I will repackage it for you, if you want me to." There is a difference between forcibly standing in the middle and the two sides wanting to transact through you because you are adding some value. That is what the telco platform has to be. It has to be the thing that the two sides want to transact through because it is so efficient and effective.
Tom: Martin, you said during your talk that Google is paying money right now for the things that the telco already has, in terms of information about customers. Could you go deeper into that for a bit?
Martin: For the Google's 10K filings, their cost space is rising. It's not rising so much through the search business that currently drives the core of their business, but it's really some other activities they're engaging in to try to offer targeted marketing services.
They are not necessarily buying location dips and stuff from telcos today. The information they are buying is often just things like demographic information. They are going to Experia and those other people to try to understand who is where and what they are doing, and that costs some money. To be able to target and customize adverts, it is not just a question of knowing what search time you entered, but what income group you are in, what zip code are you in.
They don't have that data today. That is where their costs base is inflating from. They have reached the natural limits of how much you can infer from a search key word. You need to know something about the customer to get to the next stage.
Audience 2: Martin, are the telcos really in the best position to offer these services? We have Akamai, which offered cashing outside. With the telcos in container ships, physical ports are hard to do. But, with the telcos is almost a reverse situation. Has the telco infrastructure become a liability making it harder for them to do their start up?
Martin: It depends on which part of the value chain we are talking about here. With video, the port is not just the Google plex. The ports these days are increasing the devices within the home at the setup box in which the traffic is concentrating on. If you look at the UK market, and the same thing is going to happen here, the subsidy model for the devices means that only Virgin media, BT, and Sky control that environment today.
Whether that is a good thing or a bad thing, you could have an argument about it but, they do. So, they are in a good position to do the multimodal logistics thing for data, and other people are not. They have their assets to go and do that. Maybe in voice you could go over the top like Skype does, but for the heavy weight bulk distribution of video contents, there is a crisis in trying to do everything over broadband. The reality today is we do not have fiber at every house and the telcos need to be in the logistics business to help the over the top partners deliver this content. Time is up.
Brough: We actually are running a bit ahead of schedule so if there is one more question, we can do it.
Audience 3: Thanks, Brough. Martin, just building on Tom's question, do you think Google has a better chance of adapting these principles and becoming a real operator threat or do the telcos have enough of a window to make this transition and leverage what they have that Google does not have? I guess what I want to say is, can a Web base platform win in this kind of environment, or can the telcos still have enough rope to do this right?
Martin: That is a good question. The lesson from like SMS is that end users love buying simple, easy-to-use, convenient, prepackaged additional goods. They will not go and pull together different bits of the experience and eat separately. Someone like Google who have a two-sided business model, could in principle, use free connectivity to go and offer you ad-funded content and services. That would become an enormous threat to the telecom industry because if you take out all the cost of billing and all the customer care and stuff, it could happen.
The problem at this moment is that Google only have two narrower business models. They're only good at advertising. They are not yet good at the whole marketing services thing. They have not worked out how, when you see an advert in a billboard and got the QR code and you have to go click the thing, someone in the middle would like to personalize the thing you are going to see. It is a whole complex ecosystem and value chain there. But, they have not worked out what to do and there is not enough money in advertising to cover the cost of building even for free infrastructure, stripped of all the billing and marketing and the customer care cost.
I think that the services that you like to offer for free are only compelling users when they are packaged up with the connectivity, that users are not having to go and worry about metered megabytes and downloads and stuff on a mobile. Google doesn't yet have the power to do that packaging and distribution. Even the Google Maps mobile are fantastic, how do you get it preinstalled on the handsets? How do you make it so that the data charges are free and Google pay for it? It is not just being sorted out yet. I think we are still five to ten years away from Google having a plausible attack plan on the operators and their core business.
Brough: I think, at this point, we have used up the rest of the time. Give a round of applause for Martin. That is very good. Thank you.